Spiralling downwards: Govt must make careful moves on trade talks

Global reactions to American President Donald Trump’s announcement of a new tariff structure for the United States (US) on “Liberation Day”, April 2, are now beginning to be seen. They vary widely. In what was a major negative signal for markets, China took a strong stance, tariffing US imports at 34 per cent to match the additional levy that Mr Trump had imposed on its exports. This was straightforward tit for tat — unlike the US administration’s ersatz country-specific formula, which, in spite of claims, had nothing “reciprocal” to it. Beijing can perhaps take the risk of a strong line because it is now less dependent on direct exports to the US than it has been in the past — its producers are at the heart of a supply chain that spans multiple countries which have been hit with different tariff rates. Some of those have signalled a desperate willingness for a deal: Cambodia, heavily dependent on textile exports, faces a ruinous 49 per cent tariff and has voluntarily cut import tariffs to 5 per cent in response to the US action.  Vietnam has similarly offered duty-free access to its markets to the US. It is far from certain that Mr Trump will respond positively — though many US-based companies dependent on its factory floors, such as shoemaker Nike, would dearly hope that he does.                         

The markets displayed deep concern at Beijing’s strong and swift retaliation because the outcome of such cascading confrontation over trade actions is well known. Economist Charles Kindleberger produced a famous graph, known as the “Kindleberger Spiral”, which traced out how world trade spiralled down, month after month, in the years after the 1929 stock-market crash and subsequent protectionist measures. Almost two-thirds of world trade was wiped out till then US President Franklin D Roosevelt announced that the US would reduce tariffs on any trading partner that would do so as well. While it is unlikely that world trade will fall to the same degree this time around, the danger of a severe dip and associated uncertainties cannot be ignored. Much depends on how other large trading powers, particularly the European Union (EU), respond. If they choose not to limit their reaction merely to retaliatory tariffs on merchandise trade but also to services, in which trade the US enjoys a ^100 billion surplus with the EU, then an additional spiral of escalation opens up. 

India is in a difficult position at this point. Some take heart from the fact that the country’s relative underperformance in exports means that it has been hit with a much lower rate than, say, Vietnam. But that will not assist existing exporters, who are already receiving demands for 15-20 per cent discounts on US orders that had already been settled. The exact proportions of how the additional costs will be managed — how much will be paid by consumers, by the US-based importer, and by the India-based exporter — will be decided by negotiations. The question is whether the financial system in India will be agile enough to provide the working capital required for any transition period. The government must also pay attention, at the macro level, to the US administration’s attitude on deal-making, and what it expects. Certainly, India must offer to drop unnecessarily regulatory restrictions on imports, such as quality-control orders and other non-tariff barriers. The government would do well to push for an early conclusion of the bilateral-trade agreement. It must also move swiftly on its free- trade negotiations with the EU and Britain. There is work to be done to stave off catastrophe.